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February 25, 2015

Armageddon in the Oil Patch: Is It Time to Bargain Hunt?

By Karim Rahemtulla, Chief Resource Analyst,  Wall Street Daily 
I went to the Oil and Services Conference in San Francisco to speak directly to the top brass in the industry.
With Armageddon in the oil patch, I wanted to see the whites of their eyes. I wanted to see fear. I wanted to see them begging for cash and coverage…
Instead, what I saw was optimism, with many oil CEOs saying that everything is just fine.
But they’re not telling the whole story. In fact, their happy faces indicated to me that we aren’t at a bottom for oil prices or oil stocks yet.
And those who are acting like the worst is over are about to get a giant slap in the face.
All About That Debt
I spent the better part of last week at this exclusive gathering of energy companies.
For many of the companies there, it was the first time leadership had appeared in public since the oil-price crash in December and January.
The CEOs that presented were all cheerful about their companies’ outlooks, despite the fact that the price for their commodity dropped 50% from last year. These same CEOs were optimistic in 2014, too, when prices were at $100 per barrel.
Something just wasn’t right with that picture…
You see, many will relive higher prices thanks to hedges. But those hedges are likely to expire later in the year, after which reality will soon set in. Both the companies that were hedged and the unlucky ones that weren’t in the first place will be selling oil for $50 or less per barrel!
That’s no way to make money for shareholders…
For the most part, the companies that presented are cutting back spending because they have no other choice. But, in a cruel twist, they’re still going to produce more oil than ever from existing projects.
That’s because, as I wrote recently, the new norm will be companies that have to produce a greater amount of oil at lower prices in order to meet their debt payments.
Congruently, most of the presentations focused on how reserves were increasing, and how more oil would be produced, despite lower prices.
There’s a small minority of companies that don’t have debt issues, and will come out of this crisis on top. They will be able to pick up assets, land, equipment, and personnel on the cheap from leveraged companies that are suffering – a perfect storm on both sides of the oil patch.
So if you’re looking to “bargain shop” during this period of low prices – and mark my words, the price of oil will be higher 12 to 18 months from now – then the place to look is at the well-capitalized companies without much debt.
These companies can afford to wait it out until they can produce their precious assets for sale at a profit with favorable prices.
Bottom line: Oil prices aren’t out of the woods yet, despite the recent mini rally.
From a technical and historical perspective, prices need to retest the recent lows and maybe even trade below them before they make their way higher. It’s during that retest that you should be jumping into the shares.
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
Courtesy Karim Rahemtulla for Wall Street Daily (EconMatters article archive Here)   

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